ESG Weekly Update – June 26, 2024

26 June 2024

Other Notable Developments

SDGs: In its 2024 Sustainable Development Report, the UN reported that only 16% of the Sustainable Development Goal targets are on track to be met by 2030, with the remaining 84% showing either limited progress or a reversal in progress.

G7 Energy Transition: Leaders of the Group of Seven (G7) countries have committed to transitioning away from fossil fuels in a “just, orderly, and equitable manner” with the goal of achieving net zero by 2050.

Global Energy Emissions: A report published by the Energy Institute found that energy emissions—that is, those from consumption of oil, gas, and coal for combustion-related activities—hit a record high in 2023.

U.S.: Federal Judge Dismisses Exxon’s Lawsuit against Activist Investor

On June 17, 2024, the U.S. District Court for the Northern District of Texas dismissed Exxon Mobil’s lawsuit against Arjuna Capital, LLC. As previously reported (see our Weekly Updates from February 29, 2024 and May 30, 2024), Exxon sued two of its investors—Arjuna and Follow This—to block their shareholder proposals relating to Exxon’s greenhouse gas emissions.

Both shareholders withdrew their proposals following Exxon’s lawsuit, but Exxon continued the lawsuit, seeking to block future proposals. Judge Mark T. Pittman initially allowed the suit against Arjuna to proceed but dismissed it against Follow This due to jurisdictional issues. Judge Pittman ruled the case moot following Arjuna’s “unconditional and irrevocable” pledge not to refile the proposal in the future.

Exxon’s claims were based on the U.S. Securities and Exchange Commission’s (“SEC”) Rule 14a-8, a proxy rule that allows exclusion of shareholder resolutions related to ordinary business operations or similar past proposals. Judge Pittman’s order highlighted the imbalance between Arjuna, a boutique wealth management firm, and Exxon, a large multinational conglomerate, and commented that the SEC is “behind the ball” on the issue of responding to activist shareholder proposals.


U.S.: Lawmakers Press Bank Regulators over Climate Risks

On June 13, 2024, a group of U.S. lawmakers, led by Senator Elizabeth Warren (D-Mass.) and Representative Sean Casten (D-Ill.), wrote a letter urging federal banking regulators to take “decisive action” on climate-related financial risks and stop the “obstruction” of global financial regulators’ progress in attempting to tackle the issues posed by climate-related financial risks. The lawmakers referred to the U.S.’s “lack of progress and innovation in establishing robust measures to address the financial and economic risks from climate change” as an inhibiting factor that “places [the U.S.] behind [its] international peers” in a manner that is “counterproductive to American interests.” 

The lawmakers’ call for action stems from weaknesses and gaps they identified in the Federal Reserve Board’s 2023 pilot climate scenario analysis, which assessed how the six largest U.S. banks consider climate change risks. The gaps and weaknesses identified were mainly data and modeling-related issues, which the lawmakers believe “cast serious doubt” on the ability of U.S. banks and the U.S. financial system as a whole to withstand climate-related financial risks. 

The letter poses a series of seven questions for the federal banking regulators to consider and answer by June 28, 2024. The questions concern matters ranging from the federal banking regulators’ authority to address climate-related financial risks and access to data to the rationale behind the U.S.’s decisions and stances in negotiations with the Basel Committee on Banking Supervision in the Task Force on Climate-related Financial Risks. 

Press Release – Senator Warren

EU: European Financial Regulators Issue Joint Opinion on Sustainability Disclosures

On June 18, 2024, the European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority—collectively known as the European Supervisory Authorities (“ESAs”)—issued a joint opinion in response to the European Commission’s ongoing consultation on the Sustainable Finance Disclosure Regulation (“SFDR”). The ESAs, which act as Europe’s main financial regulators, made several suggestions aimed at improving the efficacy of the disclosure regime by providing investors with clearer guidance, limiting the risk of so-called “greenwashing” in sustainable financial products, and introducing simple and clear categories for financial products.

Most prominently, the opinion calls for covered products to be categorized into one of two main categories: “sustainable,” for products that invest in clearly sustainable assets, and “transition,” for products that invest in assets aiming to improve the sustainability of existing non-sustainable assets. If greater granularity is needed, sustainability might be subdivided between “socially” and “environmentally” sustainable products. According to the opinion, eligibility for these categories should be determined by a minimum threshold based on the clearest, most objective data available, and products that do not qualify should be restricted from using certain sustainability-related terms in naming or marketing. Separately, the ESAs also called on the European Commission to consider implementing a sustainability grading scale rating the relative performance of different products. The opinion notes that such a grading scale would be relatively easy to implement using existing metrics disclosed under the SFDR and could prove particularly useful for retail investors.

Looking to the future, the ESAs take a cautious but ultimately expansive view of the SFDR. According to their recommendations, disclosures should be tailored to different levels of investor expertise and made available through a variety of different channels. They also call for careful consideration of expanding the SFDR’s scope to new products, in particular government bonds, taking into account any attendant issues or idiosyncrasies. Before any change is implemented, the ESAs recommend that any revised disclosures should be rigorously tested with consumers in order to ensure their efficacy. 

This joint opinion was issued on the ESAs’ own initiative, rather than at the direct request of the European Commission, and it is unclear if any of these proposals will be implemented. However, given their role in overseeing the European financial markets, the ESAs will continue to play an important role in the implementation and enforcement of the SFDR.

Joint Opinion
Press Release

EU: Council Formally Adopts Nature Restoration Law

On June 17, 2024, the Council of the EU formally adopted the Nature Restoration Law, which sets binding targets to restore degraded ecosystems, habitats, and species across the continent. The Nature Restoration Law is the latest in a suite of environmental regulations recently adopted by the EU, including the Corporate Sustainability Due Diligence Directive (for more information, see our Debevoise In Depth here). 

The law requires Member States to restore 20% of the EU’s land and sea areas by 2030, and ultimately all ecosystems in need of restoration by 2050. It prioritizes ecosystems with the most potential to capture and store carbon and to prevent and reduce the impact of natural disasters. EU Member States will be required to submit National Restoration Plans to the European Commission within two years of the law coming into force, that is, by mid-2026. The European Environmental Agency will regularly publish technical reports on Member States’ progress towards the targets and the Commission will report to the European Parliament and to the Council on the implementation of the law.

The law survived a contentious vote after facing months of deadlock due to opposition by farmers who claimed that the EU’s environmental regulations are too financially burdensome. 

The Nature Restoration Law will shortly be published in the EU’s Official Journal, at which point it will enter into force. It will become directly applicable in all member states.

Nature Restoration Law
Council Press Release

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